When and why to refuse life insurance – Forbes adviser

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One of the benefits of a life insurance policy is that you can access the money while you are still alive. You can withdraw money from the cash value in a number of ways, including surrendering the policy for a lump sum. Here’s how it works and when it makes sense to drop a life insurance policy.

Ways to access cash value in life insurance

If you have a permanent life insurance policy, it probably has a cash value component. There are several ways to access this money as a policyholder.


You have the option of withdrawing funds from the cash value of your policy. As long as you withdraw only the amount you’ve paid in premiums (known as base value) and not the amount you’ve earned, you won’t have to pay tax. You can withdraw more than the base value, but be prepared to pay taxes on that portion.

Withdrawing the cash value will reduce the death benefit your beneficiaries receive.

Credit policy

You can also borrow against the cash value of your policy. There is no loan application process or credit check required because you are essentially borrowing from yourself. You have to pay interest, but the rates are usually low.

If you die before the loan is repaid, the outstanding balance is deducted from the death benefit paid to your beneficiaries.


Surrendering a life insurance policy means canceling the policy and receiving its surrender value, which is the cash value minus any cancellation fees. If you go this route, coverage ends. Your beneficiaries will not receive a benefit in the event of your death.

You must pay taxes on the amount received that exceeds the cost price.

Household settlement

If you no longer need or want your policy, you can sell it to a third party in what is known as a lifetime settlement. You receive a lump sum cash payment, often for more than the surrender value (more on that later). The buyer assumes responsibility for the policy, including paying the premium, and receives the death benefit.

Residential settlements, as a rule, are intended for elderly people whose health is deteriorating.

When to cancel a life insurance policy

With so many different ways to access your cash value in life insurance, you may be wondering when is the best time to cash in your policy. Here’s an overview of some scenarios where this might make sense.

You’ve found a better deal

Even though life insurance prices tend to rise as you age and new health issues arise, there’s a chance you can qualify for a more affordable policy today than when you first took out your current policy. For example, perhaps your health has improved significantly or you have quit smoking.

In this case, it might be worth looking for a new one at a lower price. Before canceling your current policy, make sure your new policy is valid. Also, before you shop for new life insurance, see if a 1035 exchange can save you money on taxes.

You can’t afford the premium

Permanent life insurance is significantly more expensive than term life insurance. If insurance premiums are significantly reducing your income, you may be better off taking out a term life insurance policy. Consider looking for term life insurance to compare costs.

You no longer need life insurance

There are times when you just don’t need life insurance anymore. For example, if no one else is financially dependent on you, you may not need life insurance. It may not make financial sense to keep your policy in force.

You need a large amount of cash quickly

If you have significant expenses to cover, or perhaps a better investment opportunity, but you don’t have any liquid assets to draw on, opting out of a life insurance policy can be a worthwhile option, especially if your actual need for insurance is life decreased.

How to calculate the purchase price?

The surrender value of the policy is based on the portion of the premiums that have gone into the cash value account, plus the interest rate paid or investment earnings. This will deduct outstanding loans and any repossession fees.

Some policies take years to build up any significant cash value, so you may still not have much cash value.

Over time, the surrender fee tends to decrease. Ideally, you would wait until the commission is minimal or non-existent. Also, the longer you hold the policy, the higher the cash value portion will be.

Also, remember that if your surrender value is worth more than you paid in premiums, you’ll have to pay income tax on the difference.

Finally, keep in mind that your beneficiaries will not receive a death benefit if you surrender the policy. So, when researching cash value options for life insurance, consider how each method will affect your long-term estate planning and goals. Might be a better option if you need cash.

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Frequently asked questions about transferring life insurance

Can you cancel a term life insurance policy?

You can cancel a term life insurance policy at any time, but since there is no cash value component in term life, there is no money back.

What is resale value?

Cash surrender value is the amount you receive if you surrender a life insurance policy, such as a whole life insurance policy. This is the cash value you have minus any surrender charges. Surrender fees can last about 10 to 15 years after you buy the policy.

Will I pay taxes on the cash surrender value?

If the value of the cash back you receive is more than what you paid in premiums (the cost basis), you may be taxed on the excess you paid. Talk to a tax professional to determine when life insurance is taxable.

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